Tough credit-card rule may hit stay-at-home moms

No income? You could be denied under Fed’s proposed rule

By

RuthMantell

WASHINGTON (MarketWatch) — “Hi there, reporter, it’s 2011. Not 1911. Signed, SAHM with her own bank account, own car, and her own Amex.”

For readers unfamiliar with parenting acronyms, “SAHM” stands for stay-at-home mom. And this particular note from an SAHM is responding to questions I recently posted on the parenting site DCUrbanMom.com:

“Should those who do not earn independent income, but very likely have access to a spouse’s earnings, be able to have a credit card in their own name? Should there be any special limits on cards for those without independent income?”

I asked those questions because the Federal Reserve has proposed rules that could prevent stay-at-home spouses without their own income from getting a credit card. Current rules allow issuers to consider an applicant’s household income, but the proposal would force issuers to focus on each person’s income source. The rules would come into play before opening a new account or increasing the credit limit on an existing account.

While the Fed is looking to implement a sound system — the proposals would clarify prior rules that implement the Credit Card Accountability Responsibility and Disclosure Act of 2009 — some observers worry that this proposal goes too far.

“We are concerned that the board’s proposal will hamper a stay-at-home mom’s ability to establish her own independent credit history by applying independently for a card,” according to a letter from Democratic Reps. Carolyn Maloney and Louise Slaughter, both of New York. “Many stay-at-home moms have a strong work history, yet the proposed regulations ignore their demonstrated credit-worthiness because of their lack of current market income.”

Maloney and Slaughter, who played key roles in the creation of the credit-card law, said the stakes could be particularly high for those in abusive relationships: “Women trapped in abusive marriages may be unable to work due to a controlling spouse, a hallmark of relationships characterized by domestic violence. The availability of an independent credit card may represent her best chance at establishing independence and a path out of a dangerous relationship.”

While the Fed acknowledged that the proposals could affect consumers whose sole source of income currently is a spouse’s income or assets, the agency said it is focused on establishing safe standards.

“The board has previously concluded that it would be inconsistent with the intent of the Credit Card Act for a card issuer to issue a credit card to a consumer who does not have any income or assets,” according to a public notice from the Fed. Read the public notice.

Still, there are some exceptions. For community-property states in which there is joint ownership of income or assets, issuers may consider the income or assets of an applicant’s spouse.

And consumers without independent income or assets could apply jointly for a card with a spouse or other household member. Or an account holder could make a spouse an authorized user of their account.

The Fed’s final rules are expected in coming months. The public comment period for the proposals closed in January.

Credit for anyone with a pulse

One DCUrbanMom.com respondent wrote: “Credit-card companies will give cards to anyone with a pulse!”

It’s this sort of unwise access to credit to which Washington officials have been responding. “The desire is not to allow predatory lending [to] people who don’t have the ability to service credit-card debt,” said Ben Woolsey, director of marketing and consumer research at CreditCards.com, an online credit-card marketplace.

However, regulators may be going too far, Woolsey said, noting that lack of credit can have a strangling effect on other aspects of a person’s life.

“If you don’t have any credit history in your name, and you did need to get credit because of a family situation or a financial situation, you might not be able to get a mortgage or a car loan, or if you did you would have to pay astronomical interest rates,” Woolsey said. “It could be hard to rent an apartment or hard to get a job if they check your credit rating.”

One DCUrbanMom.com respondent wrote: “Stay-at-home spouses face a power inequality driven by money, which can turn sour if they want to leave the marriage and have none of their own, or want to start a business and need loans.”

In the credit-card law, U.S. lawmakers specifically wanted to protect younger consumers, those under 21, and prevent them from getting into trouble with credit. Maloney said the Fed is erring by proposing that all applicants, regardless of age, provide independent-income information.

However, the nonprofit National Consumer Law Center supports the Fed’s proposals. “If a stay-at-home mother incurs debt that she has no ability to repay, and she cannot access the spouse’s income or assets to repay the debt, she will be in [a] far worse position [than] if she had never incurred the debt,” according to NCLC.

NCLC said that considering spousal income can harm consumers by encouraging issuers to wrongfully pursue non-liable spouses for repayment.

Dave Ramsey, host of a personal-finance radio show, said all people are better off without credit cards. “We teach people to do without them, and just use debit cards so that they can live on what they make,” Ramsey said. “We don’t think you should buy it unless you can pay for it.”

Industry is worried

The proposals have the bank industry worried. Citigroup offered the Fed a list of objections to the proposals, citing concerns such as:

The proposal could place a non- or low-earning spouse in a subordinate role: “He or she would no longer have the ability to obtain credit without the higher-earning spouse, although the higher-earning spouse could obtain independent credit. This inequality conflicts with the rights, obligations, and benefits generally understood to be conferred by marriage, one of which is the sharing of income and property acquired during the marriage.”

Women would be disproportionately impacted: “Women are vastly more likely to be the spouse at home, and consequently the spouse without an ‘independent’ source of income…The proposal would take away the woman’s ability to obtain credit in her own name. All too often, the cumulative effect of the proposed rule will be to financially disadvantage women and place them in a subordinate role.”

Retailers, too, are worried. National retailer David’s Bridal told the Fed that the proposal would “curtail many routine credit-granting practices,” such as applying for a new account at the point of sale, and noted that many brides depend on credit for their big day.

“The proposed clarification would have a chilling effect on the willingness of customers to apply for store credit because of the embarrassment of being denied credit at the point-of-sale, and the possibility of being told by a store clerk in front of other customers that she must have a co-signer for the account,” according to David’s Bridal.

However, Lauren Saunders, managing attorney at the National Consumer Law Center, said, in general, that credit should only be granted if someone can repay it, and that this principle is more important than preserving the ability of department stores to grant instant credit.

“Many stay-at-home spouses either have a community property right to a share of their spouse’s income, have a legal entitlement to assets such as bank accounts, or could get their spouses to co-sign,” Saunders said. “But it does not serve anyone to let them get indebted and not be able to repay it.”

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